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Author: 


Eaton,  John  N. 


Title: 

What  the  banker  expects 
from  the  accountant 

Place: 

Lansdowne 

Date: 

1922 


MASTER   NEGATIVE  * 


COLUMBIA  UNIVERSITY  LIBRARIES 
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lYliat  the  banker  expects  from  the  accountant 5 
an  address  delivered  before  the  Massachusetts 
socj.ety  of  certified  public  accountants,  by  John 
II,  Eaton  •••  Lansdovme,  Pa.,  Robert  Llorris  asso- 
ciates, 1922. 

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LIBRARY 


School  of  Business 


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What  the 


Banker  Expects  from 
the  Accountant 


An  Address  delivered  before  the 
Massachusetts  Society  of  Certified  Public 

Accountants 

L.IBRARV 

THWl 
OHAae    NAXIONAt-    B><VNiK 

^•►o^iv^  fiSJ\    2    1926 

JOHN  N,  EATON 
Merchants  National  Bank*  Boston,  Massachusetts 
DectmheVM/f92f'' 


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Lansdowne,  Pa. 
THE  ROBERT  MORRIS  ASSOCIATES 

1922 


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Copyright  1922 

by 

The  Robert  Morris  Associates 


'     » '  *•    ' »  .' 
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What  the  Banker  Expects  from  th( 

Accountant 


By  John  N.  Eaton 


"Wliat  does  a  banker  expect  an  audited  statement  to  show'^ 
He  expects  that  it  will  set  forth  a  correct  picture  of  all  the 
assets  and  all  tlie  liabilities  of  the  company.  And  he  expects 
that  these  various  assets  and  liabilities  will  be  classified  and 
described  with  sufficient  detail  and  exactness  to  enable  him  to 
form  a  satisfactory  estimate  of  their  value  as  a  basis  for  irrantin- 
credit.  ^  ^ 

While  we  feel  that  this  is  what  an  audit  should  be,  our  ex- 
I)enence  has  been  that  many  concerns  have  an  entirelv' different 
conception  of  an  audit.  While  many  have  the  thought  that  an 
audit  will  correct  irregularities  in  their  accounting,  and  will  show 
the  executives  ways  of  improving  their  accounting  system,  it 
appears  that  in  the  majority  of  cases  the  paramount  thought  in 
their  minds  is  that  an  audited  statement  is  an  aid  in  obtaining 
credit.  Apparently  many  concerns  have  an  auditor  go  over  their 
books  with  the  latter  thought  only  in  mind,  simply  to  enable  them 
to  show  an  audited  statement.  They  do  not  care  what  the  auditor 
does  so  long  as  he  makes  up  a  statement  and  signs  it,  and  does 
not  give  the  banks  too  much  information  about  the  business. 

I  think  everyone  here  will  agree  that  a  plain  condensed 
balance  sheet  gives  one  little  idea  of  a  company's  operations. 
Without  knowing  how  the  figures  have  been  determined,  an  in- 
telligent analysis  of  them  is  impossible.  It  gives  the  present  position 
only,  and  no  idea  of  how  this  position  was  reached.  Alto-^-ether 
too  many  of  our  audited  statements  are  of  this  character.  Vhey 
are  of  little  more  value  than  the  company's  own  statement  of  its 
condition.  Of  course,  we  all  like  to  see  an  accountant's  name 
at  the  bottom  of  a  statement,  indicating  that  an  outside  expert 
has  been  over  the  books,  but  if  the  concern  lias  in  mind  having 
the  audit  made  as  an  assistance  in  obtaining  credit,  the  object  is 


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INTENTIONAL  SECOND  EXPOSURE 


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Copyright  1922 

by 

The  Robert  Morris  Associates 


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What  the  Banker  Expects  from  th( 

Accountant 


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By  John  N.  Eaton 


o   ?rj     "^^^^^  ^^^^^^  ^  ^^"^^^  ^"^P^"^^  ^"  audited  statement  to  show  ? 
^     that  it  will  set   forth  a  correct  picture  of  all  the 

11  .1  4*«*«**  . 


^«<He  expects 
:i  ii  assets  and 


all  the  liabilities  of  the  company.  And  he  expects 
that  these  various  assets  and  liabilities  will  be  classified  and 
described  with  sufficient  detail  and  exactness  to  enable  him  to 
form  a  satisfactory  estimate  of  their  value  as  a  basis  for  ^rantine 
credit.  ^ 

While  we  feel  that  this  is  what  an  audit  should  be,  our  ex- 
perience has  been  that  many  concerns  have  an  entirely  different 
conception  of  an  audit.  While  many  have  the  thought  that  an 
audit  will  correct  irregularities  in  their  accounting,  and  will  show 
the  executives  ways  of  improving  their  accounting  system,  it 
appears  that  in  the  majority  of  cases  the  paramount  thought  in 
their  minds  is  that  an  audited  statement  is  an  aid  in  obtaining 
credit.  Apparently  many  concerns  have  an  auditor  go  over  their 
books  with  the  latter  thought  only  in  mind,  simply  to  enable  them 
TO  show  an  audited  statement.  They  do  not  care  what  the  auditor 
does  so  long  as  he  makes  up  a  statement  and  signs  it,  and  does 
not  give  the  banks  too  much  information  about  the  business. 

I  think  everyone  here  will  agree  that  a  plain  condensed 
balance  sheet  gives  one  little  idea  of  a  company's  operations. 
Without  knowing  how  the  figures  have  been  determined,  an  in- 
telligent analysis  of  them  is  impossible.  It  gives  the  present  position 
only,  and  no  idea  of  how  this  position  was  reached.  Altogether 
too  many  of  our  audited  statements  are  of  this  character.  They 
are  of  little  more  value  than  the  company's  own  statement  of  its 
condition.  Of  course,  we  all  like  to  see  an  accountant's  name 
at  the  bottom  of  a  statement,  indicating  that  an  outside  expert 
has  been  over  the  books,  but  if  the  concern  has  in  mind  having 
the  audit  made  as  an  assistance  in  obtaining  credit,  the  object  is 


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almost  entirely  defeated  if  the  bank  is  not  furnished  with  details 
enabling  it  to  make  a  proper  analysis  of  the  figures.  To  make 
this  proper  analysis  one  must  know  the  quality  as  well  as  the 
quantity  of  assets;  the  liquidity  of  the  receivables,  the  market- 
ability and  method  of  valuation  of  the  merchandise.  One  wants 
to  feel  assured  that  all  the  liabilities  are  included.  In  this  latt(?r 
connection,  I  feel  that  the  auditor  should  not  only  verify  the 
bills  payable  appearing  on  the  books,  but  should  ascertain,  throug;h 
correspondence  with  all  of  the  company's  banks,  whether  there 
is  any  existing  liability,  direct  or  contingent,  through  them  which 
may  not  appear  on  the  books  at  statement  date.  If  the  statement 
indicates  only  the  amount  of  liabilities  as  shown  on  the  compan>  's 
books,  without  such  a  verification,  it  is  of  no  more  value  to  the 
banker  than  the  company's  own  statement  without  an  audit.  Here 
are  a  few  cases  to  illustrate  this  point : 

"A  statement  came  in  prepared  by ,  who  certified 

that  the  statement  was  true  and  correct.  In  checking  the  matter 
up,  however,  we  found  about  $90,000  more  outstanding  on 
statement  date  with  various  banks  and  subsequently  found  tbat 
the  cash  books  had  been  held  open  until  late  in  January  and 
collections  in  the  meantime  had  been  applied  to  a  reduction  of 
the  indebtedness.  This,  of  course,  was  a  case  of  window  dressing. 
This  incident  does  not  compare  unfavorably  with  the  accountants 

who  recently  audited and  followed  the  same  procedure. 

This  resulted  in  the  withdrawal  of  our  line  to  the  company,  sci  I 
fail  to  see  where  the  client  had  been  benefited  in  any  way." 

"A  statement  of  the ,  as  of ,  showed  bills 

payable  of  $50,000.  In  checking  the  figures  with  the  company's 
other  bank  we  ascertained  that  besides  owing  us  $50,000,  the 
company  was  also   indebted  there   for   another   $50,000.     This 

statement  was  certified  to  by ,  a  local  firm  of  accountants. 

An  investigation  brought  forth  the  information  that  the  Presid(int 
of  the  company  had  borrowed  the  $50,000  from  the  other  bank 
for  his  personal  use  and  the  entries  never  reached  the  books  of 

the  company." 

"A  clothing  house,  whose  December  31,  1920,  statement  v/as 

made  up  by   ,  an  accountant  of  this  city,  showed  total 

Notes  Payable  of  $35,000.  On  that  date  the  firm  owed  its  own 
bank  $57,500.  The  additional  amount  of  loan  was  a  personal 
matter  of  the  partner,  but  the  note  given  the  bank  was  the  firm's 
note.     It  did  not  appear  on  the  books  of  the  concern,  and  as 


the  accountant   had   not   verified  bank   loans   he  knew  nothing 
about  it." 

In  addition  to  the  quality  of  the  assets,  other  important  facts 
which  a  bank  likes  to  know  are:    Sales,  indicating  the  rapidity 
of  merchandise  turnover  and  productivity  of  capital  invested  in 
fixed  assets;   Earnings,  showing  percentage  of  profit  on   Sales 
and  on  Capital  invested ;  and  Distribution  of  Earnings,  which  is 
necessary  in  order  that  one  can  reconcile  the  Surplus  account. 
While  a  condensed  statement  without  the  above  details  is  of 
little  value,  it  is  to  be  presumed  that   such  a  statement,  over 
the  signature  of  a  reputable  auditor,  does  contain  the  essential 
facts,  even  if  it  is  impossible  to  analyze  them.     We  assume  that 
the  Accounts  Receivable  item,  for  instance,  if  not  commented 
on,  is  due  for  merchandise  sold,  and  that  in  making  a  comparison 
of  the  various  ratios  one  may  compare  this  item  with  sales,  thereby 
getting  a  picture  of  the  management's  ability  as  collectors  over  a 
period  of  years.     I  regret  to  say,  however,  that  the  practice  of 
some  accountants  in  making  up  a  company's  statement  for  its 
banks,  without  properly  separating  the  receivables,  makes  such 
a  comparison  very  uncertain  without  a  full  knowledge  of  the 
facts.    If  the  receivables  contain  items  of  any  material  size  which 
are  not  for  merchandise,  the  customary  analysis  of  receivables  to 
merchandise,  receivables  to  sales,  etc.,  is  absolutely  impossible. 
Many  examples  are  presented  illustrating  this  point : 

"A  statement  included  in  current  assets  an  item  of  loans 
receivable  $344,000.  Of  this  amount  $200,000  was  due  from 
two  of  the  officers  and  had  been  advanced  to  them  for  the  pur- 
pose of  paying  income  taxes  on  the  previous  year's  business  when 
the  concern  was  a  firm  rather  than  a  corporation.  The  balance 
of  the  item,  $140,000,  represented  a  loan  made  to  one  of  the 
officers  for  the  purpose  of  investing  in  real  estate  for  the  benefit 
of  the  corporation,  and  was  handled  this  way  because  they  did 
not  want  to  show  a  real  estate  item  in  the  figures." 

"Another  statement  included  in  the  current  assets  an  item 
of  over  $3,000,000  of  accounts  and  notes  receivable,  etc.,  less 
reserve.  This  item  included  $1,000,000  due  from  subsidiaries 
of  which  $600,000  had  gone  into  permanent  investments  in  these 
subsidiaries,  and  the  item  also  included  some  stock  in  subsidiary 
companies,  one  of  which  it  was  said  had  a  substantial  surplus, 
while  another  was  unsuccessful."    The  accountant  admitted  that 


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these  items  should  be  set  up  separately,  and  said  that  the  figures 
were  drawn  up  for  the  annual  report  to  the  stockholders  and 
the  management  had  asked  that  they  be  condensed  as  much  as 
possible. 

"Another  accountant  prepared  a  statement  for  as 

of   ,  and  failed  to  indicate  that  $100,000  of  the  notes 

receivable  were  pledged  to  the Bank  to  secure  a  loan 

there." 

"A  large  percentage  of  the  Receivables  item  of  another 
statement,  upon  investigation,  was  found  to  consist  of  claims  for 
rebate  of  Federal  taxes." 

"One  concern  had  a  claim  from  the  Government  and  also 
owed  a  considerable  amount  for  past  due  taxes.  Instead  of  listing 
as  a  liability  the  taxes  which  must  be  paid,  the  accountant  deducted 
this  from  the  amount  which  it  was  hoped  might  be  rebated,  and 
the  net  amount  was  carried  as  an  account  receivable." 

Of  course,  the  customary  analysis  of  Sales  to  Receivables, 
and  of  Receivables  to  Merchandise,  etc.,  would  be  of  no  value  in 
such  cases  because  a  large  percentage  of  the  so-called  Receivables 
have  no  relation  to  Merchandise  or  Sales.  All  too  frequently 
an  investigation  finds  that  the  receivables  include  accounts  from 
individuals  and  many  other  kinds  of  items  giving  an  entirely  false 
impression  of  the  company's  condition.  It  would  not  be  difficult 
to  recall  dozens  of  such  cases.  They  work  greatly  against  tlie 
concern  and  also  against  the  accountant,  when  they  come  to 
light.  In  an  audited  statement  where  there  is  nothing  to  indicate 
to  the  contrary,  I  should  like  to  feel,  and  I  think  I  should  have 
the  right  to  feel,  that  the  Receivables  item  is  what  it  is  expected 
to  be— that  it  is  for  merchandise  sold.  If  any  of  the  receivables 
are  from  foreign  countries,  these  should  be  separated  from  the 
others  and  the  conditions  regarding  them  commented  upon. 

Many  times  we  see  an  item  "Reserve."  This  is  too  general 
a  word ;  it  may  mean  many  things,  and  I  think  proper  accounti  ng 
calls  for  a  clear  statement  of  the  nature  of  such  an  item.  Often- 
times it  includes  taxes,  a  quick  liability. 

While  lack  of  information  regarding  details  makes  it  im- 
possible to  make  an  intelligent  analysis,  that  which  upsets  our 
calculations  perhaps  more  than  anything  else,  is  the  omission  of 
information  regarding  existing  contingent  liabilities.  Of  course, 
Contingent  Liabilities  are  of  many  kinds;  it  is  not  necessary  to 


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enumerate  them  here.     But  from  whatever  cause  they  may  arise 
and  no  matter  how  remote  may  be  the  possibility  of  the  company 
having  to  pay  them,  a  contingent  liability  is  sl  contingent  liability 
and  if  it  exists,  the  accountant,  in  my  opinion,  is  neglectful  of  his 
duty  if  he  places  his  signature  on  a  statement  without  indicating 
in  some  way  that  there  is  such  a  thing.     He  may  not  wish  to 
give  the  details,  but  there  should  be  something  to  put  the  banker 
on  notice  and  enable  him  to  look  into  the  details  if  he  considers 
it  advisable     Probably  two  of  the  most  common  kinds  of  Con- 
tingent Liabilities  which  are  overlooked  are  those  found  in  pur- 
chase commitments  for  the  following  season  and  in  Letters  of 
Credit  Liability.    In  the  latter  there  should  be  indicated  not  only 
the  amount  of  the  Letter  of  Credit  which  has  been  used,  but  also 
the  amount  unused,  giving  an  intimation  of  what  real  liabilities 
are  contemplated. 

I  have  on  file  a  large  number  of  examples  of  audited  state- 
ments which  make  no  mention  of  contingent  liabilities  which 
existed,  but  will  call  your  attention  to  just  a  few  of  them  as 
follows : 

"We  received  two  separate  statements  of  December  31,  1920, 
from  a  corporation,  each  certified  to  by  a  diflFerent  firm  of  audi- 
tors. They  agreed  in  every  particular;  no  mention  was  made 
of  a  contingent  debt,  whereas  we  ascertained  that  under  date  of 
the  statement  they  had  $65,000  of  notes  and  acceptances  redis- 

counted.    We  have  not  discussed  this  with ,  but 

admitted  it  was  a  slip-up  on  their  part,  as  they  relied  too  much 
on  the  detailed  audit  of  the  other  firm  when  they  were  making 
up  their  own  figures." 

"A   statement   of    submitted   by   a   note   broker, 

showed  no  contingent  debt,  whereas  the  detailed  audit  showed 
$30,000  bills  receivable  discounted.  The  explanation  given  by 
the  auditing  firm  was  that  the  certificate  had  been  made  by  their 
representative  in  another  city  who  apparently  did  not  appreciate 
the  necessity  for  incorporating  the  contingent  debt  in  the  state- 
ment which  was  distributed  at  large.  This  brings  up  an  interest- 
ing point  of  whether  branch  offices  always  work  on  the  same 
platform  as  the  home  office." 

"The  statement  of    ,  prepared  by   ,  made 

no  mention  whatever  of  a  contingent  liability  of  a  substantial 
amount  of  outstanding  bills  of  exchange.  The  only  excuse  of 
the  accountant  was  that  as  the  bills  of  exchange  were  drawn  on 


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an   affiliated   concern   the   company   did   not   consider   them   a 

hability." 

"An  accountant  addressed  a  cHent's  depositary  banks  for 
information  regarding  balances  and  outstandings  with  the  banks 
on  the  statement  date,  December  31,  1920.  One  bank  reported  a 
direct  liability  for  bills  payable  and  a  contingent  liability  for  bills 
receivable  discounted,  but  when  the  statement  appeared  signed  by 
the  accountant,  there  was  no  reference  whatever  to  contingent 

liabilities." 

I  have  known  of  cases,  when  concerns  have  made  no  refer- 
ence to  existing  contingent  liabilities,  where  there  has  been  some 
excuse  for  it  because  of  the  lack  of  appreciation  of  the  import- 
ance of  mentioning  them  in  a  statement  to  their  bankers.  I  fe(;l, 
however,  when  there  is  a  liability  of  such  a  nature,  that  there  is 
absolutely  no  excuse  for  an  accountant  making  up  a  concern's 
statement  for  its  banks,  or  for  any  other  purpose,  without  making 
a  notation  of  it  before  placing  his  signature  on  the  statement. 
Some  accountants  are  very  particular  on  these  points,  but  I  am 
forced  to  believe  that  many  give  little  thought  to  the  matter.  Tlie 
following  is  a  copy  of  a  certificate  accompanying  a  statement  pre- 
pared by  an  accountant  who  appreciates  the  importance  of  show- 
ing a  concern's  true  condition. 

''Cash 

Amounts  on  deposit  in  foreign  banks  included  in  this  item 
are  computed  at  current  rates  of  exchange  on  December 
31,  1920. 

Accounts  Receivable — Customers 

This  item  includes  a  balance  on  one  account  of  $137,362.49 
on  which  the  goods  have  been  billed,  but  on  which  \vt 
understand  that  shipment  has  not  yet  been  consented  to 
by  the  customer ;  $72,532.81  of  this  account  is  included 
in  the  $132,379.62  of  overdue  accounts  shown  in  note 
on  Page  1. 

Merchandise  Inventory 

Goods  seen  and  quantities  checked  on  Raw  Materials,  Sup- 
plies and  Manufactured  Goods  amounting  to  $289,562.57. 

This  inventory  is  stated  not  to  contain  certain  Merchandise 
bought  for  next  year's  business  which  was  on  hand  when 
Inventory  was  taken  amounting  to  $45,269.00  net. 

Accounts  Payable 

These  Accounts  Payable  are  stated  not  to  include  any  liabil  ity 
for  certain  Merchandise  bought  for  next  year's  busintiss 


which  was  on  hand  when  Inventory  was  taken  amount- 
mg  to  $45,269.00. 

Contingent  Liability 

Contingent  Liability  on  account  of  accommodation  endorse- 
ment of  contractor's  note  in  connection  with  purchase  of 
lumber  $25,000. 

Contingent  Liability  under  joint  and  several  letter  of  guar- 
anty for  advances  on  purchases  for  X  Company  $257,000. 

The  Y  Company  states  that  its  commitments  for  Merchan- 
dise on  December  31,  1920,  did  not  exceed  $1,500,000 
and  were  all  for  immediate  use,  and  that  all  estimated 
losses  on  same  have  been  provided  for  in  the  financial 
statement;  they  also  state  that  construction  contracts 
uncompleted  on  December  31,  1920  did  not  exceed  the 
sum  of  $500,000. 

Materials  and  Supplies  Commitments  on  December  31,  1920 
amounted  to  $400,000  of  which  $250,000  were  for  im- 
mediate delivery  and  $150,000  were  for  deferred  de- 
livery; of  this  latter  class  $50,000  were  deliverable  at 
option  of  the  Company,  and  on  many  of  the  Commit- 
ments deliveries  are  now  being  made  at  reduced  prices. 

Cumulative  Preferred  Dividends 

Cumulative  Dividends  on  Preferred  Stock  amounting  to 
$85,000  not  included  in  this  statement  as  a  liability." 

The  following  notes  from  a  number  of  other  certificates  also 
indicate  an  intention  to  show  the  banker  how  far  the  accountant 
has  gone  and  to  call  his  attention  to  anything  unusual  which  may 
be  hidden  in  the  balance  sheet : 

"Accounts  Receivable,  Accounts  Payable,  Personal  Balances, 
were  not  confirmed  by  correspondence." 

"Analysis  of  Customers'  Accounts  shows : 

$113,572.94   for   shipments   over   four   months  old   on 
Domestic  Accounts. 

$27,098.29    for    shipments    over    four    months    old    on 
Cuban  Accounts. 

$189,645.27  for  shipments  over  four  months  old  on  other 
Foreign  and  Canadian  Accounts." 

"These  accounts  include  $42,539.26  for  goods  which,  since 
December  31,  1920,  have  been  transferred  from  Customers  to  the 
Company's  foreign  selling  agents  for  resale." 

"Merchandise  Inventory  is  stated  by  the  Company  to  be 
valued  at  cost  or  market,  whichever  was  lower.     Quantities  are 


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as  stated  and  sworn  to  by  Employees  of  the  Company.  Exten- 
sions and  footings  verified  by  us." 

"Merchandise  Inventory  and  Accounts  Payable  are  stated  to 
include  all  Merchandise  and  Liability  on  account  of  same  De- 
cember 31,  1920." 

"The  Company  states  that  the  outstanding  commitments  De- 
cember 31,  1920  were  less  than  $197,000  and  in  the  aggregate 
would  show  no  loss  as  compared  with  market  prices  as  of  that 

date." 

'The  Notes  Payable  were  confirmed  by  correspondence." 

'Dividends  on  the  Preferred  and  Common  Stock  amounting 
to  $79,034  declared  on  January  5,  1921,  have  not  been  deducted 
from  the  surplus  as  shown  above." 

Many  cases  are  constantly  coming  to  light  of  so-called  audited 
statements  where  an  accountant  has  made  a  superficial  examina- 
tion or  has  made  up  a  condensed  statement  from  his  full  audit 
without  showing  points  of  vital  importance.  I  feel  very  strongjly 
that  every  audited  statement  should  be  accompanied  by  the  Ac- 
countant's certificate  stating  what  he  has  done.  I  think  this  has 
been  one  of  the  most  common  omissions  in  the  work  of  account- 
ants. Many  simply  state  that  the  subject's  books  have  shown  such 
and  such  figures.  In  cases  where  a  banker  is  not  to  be  shown 
the  full  audit  report,  he  should  at  least  have  a  report  stating  as 
clearly  as  possible  how  far  the  accountant  has  gone  and  how  the 
figures  have  been  determined.  This  report  or  certificate  should, 
among  other  things,  report  on  the  age  and  quality  of  Receivables, 
Merchandise  valuations  and  marketability,  verification  of  liabili- 
ties, and  notation  of  amount  of  commitments  or  other  contingent 
liabilities.  We  see  many  so-called  certificates  which  mean  abi^o- 
lutely  nothing — ^they  cannot  be  taken  seriously.  Here  are  a  few 
samples  of  many  of  which  have  come  to  my  notice : 

"I  hereby  certifiy  that  the  above  is  a  true  and  correct  trans- 
cript of  the  Assets  and  Liabilities  appearing  on  the  books  of  the 
,  on  December  31,  1920." 

There  is  no  information  as  to  the  basis  at  which  the  mer- 
chandise was  taken,  no  reserves  for  taxes,  depreciation  or  tiad 
debts,  nothing  to  show  whether  a  real  audit  was  made  or  not. 

"I  certify  that  the  Balance  Sheet  herewith  presented  is  a 

true  copy  of  the  Assets  and  Liabilities  of  ,  as  on  their 

books  as  of  December  31,  1920." 


"We  have  examined  and  audited  the  books  and  accounts  of 

for  the  period  January  1,  1921  to  August  31,  1921,  and 

herewith  present  the  above  statement  of  Assets  and  Liabilities, 
subject  to  such  allowances  for  accrued  and  deferred  items,  as  may 
not  have  been  considered.  The  inventory  herein  shown  is  furn- 
ished, prices  being  taken  at  market  value." 

"We  hereby  certify  that  the  above  is  a  true  statement  of 
Assets  and  Liabilities  as  disclosed  by  the  company's  books  as  of 
April  30,  1921." 

"We  hereby  certify  that  to  the  best  of  our  professional 
knowledge  the  foregoing  is  a  true  statement." 

"I  hereby  certify  that  the  above  Balance  Sheet  is  a  fair 
statement  of  the  condition  of  the  company  at  December  31,  1920." 

"I  have  examined  the  above  account  and  find  it  correct." 

"The  above  figures  are  in  accordance  with  the  books  of  the 

,  as  of  August  1,  1921,  and  represent  the  true  financial 

condition  of  the  company  as  of  that  date." 

In  the  last  case  the  accountant  admitted  that  he  had  made  no 
audit  whatever,  but  simply  made  up  a  statement  from  the  com- 
pany's books  of  that  date  for  the  client  to  show  his  bank,  and  did 
not  know  whether  the  books  showed  the  true  financial  condition 
of  the  company  or  not. 

While  a  concern  may  not  have  had  any  contingent  liability 
on  statement  date,  it  is  of  great  importance  if  one  is  considering 
the  extension  of  a  line  of  credit  direct,  or  wishes  to  handle  intelli- 
gently an  inquiry  from  some  other  source  where  credit  is  being 
sought,  that  information  should  be  available  as  to  whether  the 
concern  may  customarily  have  contingent  liabilities  at  other  times 
of  the  year.  An  audit  seldom  reveals  this  information.  But  it 
is  not  infrequent  for  a  concern  to  have  a  window  dressing  before 
statement  date.  Sometimes  a  contingent  liability  is  shifted  to 
affiliated  interests.  If  it  is  customary  for  a  concern  to  have  con- 
tingent liabilities  of  important  amounts  during  the  year  which 
may  be  eliminated  preparatory  to  making  up  a  statement,  it  would 
be  of  great  assistance  to  the  banker  if  the  accountant  should  note 
this  fact.  In  one  illustrative  case  of  this  kind  which  recently  came 
to  light,  the  accountant,  upon  being  questioned  regarding  it,  ad- 
mitted his  wrong  and  oflFered  no  defense  except  that  the  company 
felt  there  was  no  likelihood  of  its  being  called  upon  to  meet  the 


yyW!,!i(|ip>,iiiai.ik|i|>a.:-->i,wJi>,J4au-u^'^ 


. ..  * 

^  ! 


obligation.  The  banker  is  entitled  to  know  the  facts,  and  prefers 
to  form  his  own  opinion  as  to  the  probabiHty  or  improbability  of 
a  contingent  liability  becoming  a  direct  one. 

If  an  audit  is  intended  to  assist  a  concern  in  obtaining  credit, 
why  should  any  of  the  information  it  contains  be  withheld  from 
the  banks?  Why  should  figures  made  up  for  the  banks  frequently 
give  so  much  less  information  than  those  made  for  the  company 
itself  ?  If  the  information  is  favorable,  the  credit  will  be  granted 
more  freely.  Information  withheld  or  covered  up  creates  suspi- 
cion— telling  the  worst,  if  the  case  is  bad,  may  create  sympatliy 
arid  induce  help  when  dealing  with  the  right  kind  of  a  banker. 
Many  concerns  have  an  entirely  wrong  impression  of  the  bank 
man.  They  look  at  him  as  one  who  is  trying  to  take  their  hist 
penny !  In  reality,  the  concern  is  asking  the  bank  man  to  trust  it 
with  the  bank's  funds — with  very  little  actual  information  on 
which  to  base  judgment  as  to  the  value  of  the  credit  risk.  In- 
stead of  trying  to  get  something  to  which  he  is  not  properly  en- 
titled, the  banker  of  the  highest  type  is  interested  in  every  detail 
of  his  customer's  business,  is  ready  and  anxious  to  help  him,  and 
is  usually  qualified  to  do  so  because  of  the  training  and  experience 
he  has  gained  through  dealings  with  others. 

If  an  audit  is  to  be  used  to  assist  in  obtaining  credit,  how 
is  it  so  used — what  is  its  purpose?  Is  it  simply  made  to  give  the 
banker  the  assurance  of  the  concern's  honesty,  to  prove  that  the 
figures  give  a  true  picture  of  the  company's  books  ?  A  banker  is 
always  glad  to  know  that  an  outside  expert  has  examined  a  bor- 
rower's book,  but  very  few  of  a  bank's  losses  come  from  false 
statements.  I  have  before  me  a  list  of  sixty-eight  prominent  con- 
cerns from  all  over  the  United  States,  that  have  been  in  dii^- 
culties  the  past  year  and  a  half.  So  far  as  I  have  been  able  to 
learn,  only  one  of  them  made  a  false  statement,  and  the  head  of 
that  one  concern  had  for  years  been  in  ill  repute,  and  there  w^as 
little  excuse  for  a  bank  being  caught  with  his  notes  in  its  pocket 
book.  Of  these  sixty-eight  concerns  forty  were  issuing  audited 
statements  when  they  got  into  trouble.  Gentlemen,  if  you  had 
asked  me  five  years  ago  if  I  felt  like  asking  all  our  borrowers  to 
have  their  accounts  audited,  I  would  have  said  "Yes,"  but  to  be 
perfectly  frank,  I  have  seen  so  many  faulty  and  useless  audits 
during  that  time,  I  feel  much  less  like  giving  any  such  blanket 
recommendation.    Altogether  too  many  of  them  report  what  the 


pi8WMaaatt..iM.ie?^sn;.;.Miakaa-^^^^ 


company  wants  reported,  rather  than  what  ought  to  be  reported. 
Too  many  accountants  are  afraid  of  losing  business.  It  is  to  one's 
credit  to  lose  business  sometimes.  If  the  standards  of  audits  are 
not  raised  there  is  little  future  for  your  profession. 

While  some  losses  are  the  result  of  falsified  figures,  which 
a  proper  audit  would  discover,  most  of  a  bank's  losses  come,  not 
from  false  statements  or  lack  of  financial  audits,  but  from  the 
improper  manufacturing  and  merchandising  methods  of  those  to 
whom  they  are  loaning  money.    Many  concerns  of  course  need  a 
financial  audit,  but  in  my  opinion  what  they  most  need  is  an 
industrial  audit;  if  a  concern's  management  is  able  and  honest 
and  the  business  appears  well  handled  and  profitable,  if  its  own 
accounting  methods  give  evidence  of  competency  and  clearness 
as  shown  by  the  information  available,  it  gives  me  little  added 
confidence  to  have  its  statement  signed  by  an  accountant.    Under 
such  conditions,  granting  of  credit  is  not  a  mechanical  process. 
A  large  percentage  of  the  credit  risk  is  to  be  found  in  the  per- 
sonnel of  the  management,  its  character,  ability  and  application. 
Of  course,  many  concerns  do  not  have  a  system  of  their  own 
which  enables  them  to  show  the  important  details  to  their  banks 
in  a  clear  and  intelligible  manner.     An  audit  of  any  kind  helps 
these  people  and  helps  their  banks.     But  the  audit  which  is  of 
real  value  is  not  an  audit  to  enable  a  company  to  borrow  more 
money,  but  one  which  will  enable  a  company  to  make  more  money 
—an  audit  which  will  promote  better  management,  full  knowledge 
of  costs,  proper  routing,  proper  industrial  processes,  efficiency, 
and  point  out  the  economic  factors  affecting  the  expansion  and 
contraction  of  ihe  ^vbde  ihdufeta-Jr.f  .*>The/whole  idea  of  the  audit, 
as  it  is  usually  Vef erred' topis' wtJrig. '  If  the  manufacturing  and 
selling  are  property  handled;  tfec  financing.  Ajrill  be  a  simple  matter. 

I  feel  that  a  great  deal  'of  time  and  money  is  wasted  by  con- 
cerns having  their  arcounts,,  examined  .b^^  auditors  who  do  very 
little  but  check  back  dvfeV-aibot  df'*i)GcJkk^ping  accounts,  following 
up  some  minor  details  that*are  not  of*  importance,  and  spend  little 
time  in  determining  the  value  of  the  receivables  and  merchandise, 
and  give  little  or  no  help  or  suggestions  which  would  lead  to 
greater  efficiency  and  economy  in  managing  the  business.  Of 
course,  a  good  financial  audit  is,  without  doubt,  of  some  help. 
A  great  deal  of  real  auditing  is  done  which  is  not  the  type  first 
referred  to  as  being  satisfactory  to  one  who  simply  wishes  a 


t 


Vi^-Vf 


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«    -■ 


Statement,  bearing  an  auditor's  signature,  to  present  to  his  bank 
as  a  basis  for  credit.  A  good  financial  audit  can  be  of  much 
benefit  to  a  mercantile  concern  and  to  its  bankers,  but  I  feel  that 
when  you  gentlemen  make  simply  a  so-called  financial  audit,  you 
are  losing  your  opportunity  for  helpful  and  constructive  work. 
If  a  concern  spends  $1000  for  the  kind  of  audit  which  is  fre- 
quently given,  they  would  better  spend  $1500  or  $2000  and  get 
something  which,  as  I  said  before,  would  help  them  to  make 
more  money  rather  than  borrow  more  money. 

You  will  say,  of  course,  that  you  do  what  you  are  paid  to 
do.  Right  there  is  an  opportunity  for  you  to  do  constructive 
work.  If  what  you  do  is  of  little  value  to  your  clients,  educate 
them  to  allow  you  to  do  something  that  is  of  real  value  to  them. 
A  good  accountant,  like  a  good  banker  or  a  good  business  man, 
does  not  mind  turning  away  business  when  it  is  not  of  the  right 
kind.  To  do  the  work  I  think  you  ought  to  do  of  course  necessi- 
tates your  having  trained  and  skilled  workmen.  I  believe  there 
is  a  field  for  such  work.  I  know  some  are  doing  :*t  now.  Work 
of  your  kind  poorly  done  is  little  better  than  work  not  done  at 
all.  I  feel  that  in  your  line  above  all  others,  there  is  an  oppor- 
tunity for  service  far  greater  than  is  usually  realized.  The  banker 
is  in  a  position  to  turn  a  great  deal  of  business  your  way.  He 
does  recommend  your  service,  but — ^you  will  pardon  my  frank- 
ness— ^he  would  recommend  it  more  strongly  if  he  were  sure  his 
customer  would  get  his  money's  worth. 

I  think  the  banks  can  do  a  great  deal  for  their  customers  by 
recommending  that  they  employ  the  service  of.  those  who  are 
known  to  do  thorough  and  confedentious  work,  and  I  think  the 
accountant  can  do  a  great  deal  more  for  his  clients  by  educating 
them  to  be  open  and  i.rank. with  their  bank?  and,  to  show  them 
everything  there  is  to  see,  with  the  feeling  tW  if  they  withhold 
unfavorable  information  th^y  are  deceptive,  but  if  they  tell  tlie 
whole  story  of  their  affairs,  their  banks"  are  going  to  help  them 
work  out  their  problems.  Nothing  will  help  your  profession 
nfore  in  this  respect  than  for  you  to  insist  to  your  clients,  and  for 
us  to  insist  to  ours,  upon  the  right  of  the  banker  to  discuss  his 
customer's  affairs  with  the  accountant.  The  banker  and  the  ac- 
countant should  work  together  in  promoting  this  harmony  and 
co-operation,  which  will  be  of  great  benefit  to  your  clients  and 
to  ours,  and  a  corresponding  help  to  your  work  and  to  our  work." 


I* 


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statement,  bearing  an  auditor's  signature,  to  present  to  his  bank 
as  a  basis  for  credit.  A  good  financial  audit  can  be  of  much 
benefit  to  a  mercantile  concern  and  to  its  bankers,  but  I  feel  that 
when  you  gentlemen  make  simply  a  so-called  financial  audit,  you 
are  losing  your  opportunity  for  helpful  and  constructive  work. 
If  a  concern  spends  $1000  for  the  kind  of  audit  which  is  fre- 
quently given,  they  would  better  spend  $1500  or  $2000  and  get 
something  which,  as  I  said  before,  would  help  them  to  make 
more  money  rather  than  borrow  more  money. 

You  will  say,  of  course,  that  you  do  what  you  are  paid  to 
do.  Right  there  is  an  opportunity  for  you  to  do  constructive 
work.  If  what  you  do  is  of  little  value  to  your  clients,  educate 
them  to  allow  you  to  do  something  that  is  of  real  value  to  th(im. 
A  good  accountant,  like  a  good  banker  or  a  good  business  man, 
does  not  mind  turning  away  business  when  it  is  not  of  the  right 
kind.  To  do  the  work  I  think  you  ought  to  do  of  course  necessi- 
tates your  having  trained  and  skilled  workmen.  I  believe  there 
is  a  field  for  such  work.  I  know  some  are  doing  it  now.  Work 
of  your  kind  poorly  done  is  little  better  than  work  not  done  at 
all.  I  feel  that  in  your  line  above  all  others,  there  is  an  oppor- 
tunity for  service  far  greater  than  is  usually  realized.  The  banker 
is  in  a  position  to  turn  a  great  deal  of  business  your  way.  He 
does  recommend  your  service,  but — you  will  pardon  my  frank- 
ness—he would  recommend  it  more  strongly  if  he  were  sure  his 
customer  would  get  his  money's  worth. 

I  think  the  banks  can  do  a  great  deal  for  their  customers  by 
recommending  that  they  emplo>;  .the  services,  of.  those  who  are 
known  to  do  thorough  and  conscientious  ^  work,  ^nd  I  think  the 
accountant  can  do  a  great  deal  more  for  his  clients  by  educating 
them  to  be  open  and'.fA-ank^wh  their  bank?  aiidito  show  them 
everything  there  is  to  see,  wit^^i  the'feeling  tbat  if  they  withhold 
unfavorable  information  th^y  are  deceptive,  but  if  they  tell  the 
whole  story  of  their  affairs,  their,  batiks  are  going  to  help  tliem 
work  out  their  problem's.  '  Nothing  'will  help  your  profession 
nfore  in  this  respect  than  for  you  to  insist  to  your  clients,  and  for 
us  to  insist  to  ours,  upon  the  right  of  the  banker  to  discuss  his 
customer's  affairs  with  the  accountant.  The  banker  and  the  ac- 
countant should  work  together  in  promoting  this  harmony  and 
co-operation,  which  will  be  of  great  benefit  to  your  clients  and 
to  ours,  and  a  corresponding  help  to  your  work  and  to  our  work." 


i 


.  T 


Date  Due 

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SEP 

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